Homework 03

ANSW
ECON 305.
Dr. Dan Gerlowski
This homework assignment is to be understood by all students. It will be presented
by the Charcoal and Red teams by Saturday 2/19/11 at 11:00 p.m. Each of these
teams will submit one word file to the conferences section of the course not to
the conferences for the individual study groups but to the course conference
section. In the main course conference section they will respond to my conference
posting for homework number 3. The Green and Salmon teams are to provide
comment and critique. The Green Team will comment and critique the Charcoal
Teams work; the Salmon Team will comment and critique the Red Teams work.
These comments and critiques are due by Monday 2/21/11 at 11:00 p.m. For
further details please check the link off of the course syllabus. The comment and
critique will represent the commenting teams single response; if you present
different points of view discuss them fully. After the two sets of comments and
critiques are posted on 2/21 you or your team is permitted to comment if
you wish.

1. In the market for Good X

shown at right, a price floor
is imposed at a price of PF =
$7.23 Please answer the
following questions about
this market.
a. How many units of the
good are exchanged at
the mandated price?
b. Tell whether there is
excess demand or excess supply and how many units are
involved.
c. Describe at least one type of non-market transaction that
may occur to move the market towards equilibrium.
a. With the mandated price there will be 205 units
exchanged. Sure 285 will be brought to market, but only
205 will be purchased

b. There is an excess supply of 80 units.

c. Sellers may begin to cut price in ways that dont
address the law; i.e. with a buy 2 get 1 free type thing, or
engaging in secret sales perhaps on a black market.

2. The demand function for good G is given by QDG = 150 +

0.005*M 2*PG. The supply function for good G is given by QSG
= 1.3333 +60*PG .
a. If consumer income is 100,000 what is the demand
function for good G?
The demand function becomes by QDG = 650 2*PG
b. Again if consumer income is 100,000 what is the market
equilibrium price and quantity?
The demand function becomes by QDG = 650 2*PG and
you can solve for equilibrium to be price = 10.46,
quantity equal 629 (subject to rounding)
c. If consumer incomes increase to 120,000 what is the new
market equilibrium?
The demand function becomes by QDG = 750 2*PG and
you can solve for equilibrium to be price = 12.08 and
quantity equal 726 (subject to rounding)
3. For each of the following pairs of goods please identify which you
expect to have a more elastic demand in terms of the goods own
price. Use one of the 3 factors impacting price elasticity of demand
given in the text.

a. Ford Focus versus All automobiles.

For Focus will have a more elastic demand because there are
more substitutes for a Ford Focus than there are for all
automobiles.

b. Coke versus soft drinks.

Coke will have a more elastic demand because there are more
substitutes for Coke than there are for all soft drinks.

c. Table salt versus Lettuce.

Lettuce will have a more elastic demand because lettuce is a
bigger percentage of the consumers budget than table salt.

d. Heart medications (a group) versus Nike sports shoes.

Nike Sports Shoes because there are there are substitutes
available.

e. Cocaine to an addict versus Android cell phones.

Android cell phones because there are substitutes for them,
while there is no substitute for cocaine for an addict.

4. Suppose that he demand function for good X is given by Q DX = 100

3*PX + 0.002*ADVX where QDX is the quantity demanded of good X, PX
is the price of good X, and ADVX is the amount of advertising done
for good X. Fully explain each calculation that you do.

a. If the amount of advertising is fixed as $150,000 what is the

own price elasticity of demand when the price of good X equals
50?
Substituting 150,000 in for advertising gives us a demand
function of 400 3*PX When the Price of X equals 50 the
quantity demanded is 250. Using the equation on p. 91 we get
(-3)*(50/250) = -0.6

b. If the amount of advertising is fixed as $150,000 what is the

own price elasticity of demand when the price of good X equals
60?
Using the demand above with the constant term of 400, the
quantity demanded is now 220. Using the equation on p. 91
we get (-3)*(180/220) = -0.818

c. If the amount of advertising for good X increases and the

increased advertising works to make people more strongly
desire good X, how would we expect the price elasticity of
demand to change because of the increased advertising?
If the advertising works to make good X more attractive, we
would think then that the increased advertising would make
good X more attractive relative to any competing products or
uses of consumer funds; put another way we would expect the
advertising to convince consumers that there are fewer
substitutes for good X and we would expect to see demand
become less elastic or more inelastic i.e. we would expect to
see the elasticity number get smaller in absolute value.

d. If the amount of advertising increases to $175,000 what is the

own price elasticity of demand for good X when the price of X
equals 60?
We need to resolve the demand function using 175,000. We

get of 450 3*PX Again using the formula on p. 91 we get (3)*(60/270) =- 0.666.

e. Did your calculation in part d meet your expectations from part

c?
Yes, we expected to see demand get less elastic or more
inelastic and it did going from -0.8 in part b. to -0.6 in part d.

5. The demand curve for a product is given by QDX = 1000 2*PX +

0.02*PZ, where PZ = $400.

a. What is the own price elasticity of demand when PX = 154?

Subbing in we get 1008 2*PX which equals 700.
is then (-2)*(154/700) = -0.44

The formula

b. Is demand elastic or inelastic at this price?

Since it is less than 1 in absolute value, demand is inelastic.

c. What would happen to the firms total revenue if it decided to

charge a price below 154?
If a price less than $154 is charged then total revenues would
decline. An increase in price would raise total revenues.

d. What is the cross price elasticity of demand between good X

and good Z when PX = 154? Are goods X and Z substitutes of
compliments?
Cross price elasticity using the equation on p. 91 we get
(0.02)*(154/700) 0.0044. Since it is positive, the goods are
substitutes.

6. Suppose the cross price elasticity of demand between goods X and Y

is -5.0. How much would the price of good Y have to change in order
to increase the consumption of good X by 50%?
Using the equation from the book, or the concept around the
equation on page 86, I get a reduction in the price of good Y of 10%
is needed.

7. I observe that the market for Fisbins had an equilibrium price of

$100 and an equilibrium quantity of Fisbins exchanged of 2100 in
2001. I also observe that in June, 2010 the equilibrium price of
Fisbins was $200 and the quantity of Fisbins exchanged was 4200.
Can I conclude from these observations that the demand for Fisbins
is perfectly inelastic? Fully explain why or why not.
No, the ceterius paribus assumption is violated because many years
have passed. The elasticity of demand is drawn for a given demand

curve if the demand curve shifts then there is a new elasticity of

demand..

8. Suppose the inverse demand function for good X is given by PX =

100 -0.05*QX. If the quantity demanded of good X is 1800, what is the price
elasticity of demand for good X.
There are many ways to do this problem. Per the formula in the
text we need to use the demand function not the inverse demand
function to find the coefficient of price. If we rearrange the inverse
demand function to get the demand function we get Q = 2000
20*PX. Then we apply the formula (-20)*(10/1800) = -0.1111